Published: May 19, 2013 at 12:28 pm

The “Dogs of the Dow” strategy is one of the simplest for beating the market. Over the coming year, I’ll track the Dogs’ performance and keep you abreast of news affecting these companies.

The strategyThe Dogs strategy involves buying and holding equal dollar amounts of the 10 best-yielding dividend stocks of the Dow Jones Industrial Average (Dow Jones Indices:.DJI). The strategy banks on the idea that blue-chip stocks with high yields are near the bottom of their business cycle and should do much better going forward. Investors in the strategy then would get not only large dividends but also gains in the stocks underlying those dividends.

High-yield dividendsHigh-yield portfolios are often dismissed as inferior to their growth counterparts for various reasons:

Others believe that dividend payments mean that management believes the business is done growing.

Evidence from Tweedy, Browne refutes these falsehoods. Research shows that portfolios of high-yield dividend stocks outperform lower-yielding portfolios and the market in general. In fact, a study by noted finance professor Jeremy Siegel found that over 45 years, the highest-yielding 20% of S&P 500 stocks outperformed the S&P 500 by three times! The highest-yielding stocks turned a $1,000 investment in 1957 into $462,750 by 2002, compared with $130,768 if the same money was invested in the index.

PerformanceAfter beating the Dow Jones Industrial Average (Dow Jones Indices:.DJI) by 6.8% in 2011, the Dogs underperformed the Dow by 0.2% in 2012.

Check out the Dogs’ performance in 2013 so far:

Company

Initial Yield

Initial Price

YTD Performance

AT&T

5.34%

$33.71

12.50%

Verizon

4.76%

$43.27

24.74%

Intel Corporation (NASDAQ:INTC)

4.36%

$20.62

17.84%

Merck

4.20%

$40.94

13.42%

Pfizer

3.83%

$25.08

16.49%

DuPont

3.82%

$44.98

25.37%

Hewlett-Packard

3.72%

$14.25

50.21%

General Electric

3.62%

$20.99

12.68%

McDonald’s

3.49%

$88.21

16.05%

Johnson & Johnson (NYSE:JNJ)

3.48%

$70.10

26.68%

Dow Jones Industrial Average

13,104

17.17%

Dogs of the Dow

21.60%

Dogs Return vs. Dow (Percentage Points)

+4.43%

Source: S&P Capital IQ as of April 18.

This week, the Dow Jones Industrial Average (Dow Jones Indices:.DJI) was up 1.58%. The Dogs rose less than the Dow, moving down 0.87 percentage points. That brings the Dogs’ outperformance down to 4.3 percentage points better than the Dow.

There were a bunch of economic reports and some other extraneous factors boosting the Dow Jones Industrial Average (Dow Jones Indices:.DJI) this week. The Dow’s momentum continues to carry it up and was boosted this week by better-than-expected retail sales on Monday. Later in the week, inflation reports for both consumers and producers were below the Federal Reserve’s target of 2%, which bodes well for the government’s continuing of its bond buying.

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